Global de-Dollarisation! Can BRICS lead the way for trade in local currencies?

The BRICS summit at Kazan in Russia took a few tentative steps to push trade in local currencies, payment instruments and platforms but stopped short of announcing a timeline to fully de-dollarise their trade and omitted any mention of a shared currency. Rather, it reposed faith in the IMF and the global financial safety net it provides with greater representation of emerging economies.

To de-dollarise their trade, the Kazan declaration committed to: (i) further develop its bank, New Development Bank (NDB) – earlier called ‘BRICS Development Bank’ set up in 2015 – and improve coordination with the BRICS Interbank Cooperation Mechanism (ICM), set up in 2010; (ii) set up a grain (commodities) trading platform and expand it later to other agricultural sectors; (iii) study the feasibility of independent cross-border settlement and depositary infrastructure (BRICS Clear); and (iv) independent reinsurance capacity (BRICS (Re)Insurance Company) on a “voluntary basis”.

The chances of declaring a shared currency – as an alternative to the American dollar (USD) – had receded with the June 2024 joint statement of its foreign ministers which was silent on it, while committing to address the “rarely seen before” risks and challenges the international community is confronted with. The theme of the summit held under the Russian chairship was telling: “Strengthening Multilateralism for Just Global Development and Security”.

However, an equally potent threat to the USD may emerge from the US itself.

Former US President Donald Trump is gaining ground in the presidential election scheduled for November 5. He has declared he will impose “100% tariff” on import of goods from countries who go for non-USD trade (“You leave the dollar and you’re not doing business with the United States because we are going to put a 100% tariff on your goods”).

No one can take Trump’s threat lightly.

The EU is already prepared with a list of goods from the US for higher tariffs to counter-attack – should Trump win and carry out his threat. Trump is not only seen as the most polarising of all US Presidents, he made de-globalisation his calling card in his first term (2016-2020) and launched a full-fledged trade war with China (2018) which continues. Both (100% tariff and polarisation in the US) would devalue the USD and accelerate de-dollarisation.

What makes a reserve currency?

Benjamin J Cohen of University of California best illustrated the factors in 2009: “Is the issuer of a currency capable of ensuring political stability at home? Can it project power abroad? Does it enjoy strong intergovernmental ties – perhaps a traditional patron-client linkage or a formal military alliance? The future of reserve currencies is a matter of political economy, not economics alone.”

Some of the other factors Cohen and others have pointed out are: host country’s governance by the rule of law, predictable legal system, commitment to free-floating regime, smooth functioning of financial systems (liquidity) and transparency and private market preference.

Existential threats to USD

It has been long recognised that the threat to USD’s dominance comes more from the US’s political and economic stability. The two biggest existential threats to it came from internal sources: (i) high inflation, devaluation of the USD, its de-coupling with gold and collapse of the Bretton Woods’ fixed-rate exchange system in 1970s and (ii) near collapse of its financial systems during the 2007-09 Great Recession. The USD weathered both as, ironically, countries rushed to it later for their own economic safety and stability – in absence of alternatives.

But de-dollarisation has been happening for the past two decades and more. The IMF’s Currency Composition of Official Foreign Exchange Reserves (COFER) data capture the fall in the USD’s share of forex reserves with central banks and governments – from over 70% in 2000 to 54% in Q2, 2024.

Why BRICS is a big deal for USD

The BRICS is rapidly expanding. It added four new members in January 2024 to take the total to nine. The collective strength of the nine is staggering: 37.3% of global GDP (more than double the EU’s 14.5 %) and about 40% of global share of exports and crude oil production.

Another 34 countries have applied for membership, including the strife-torn Palestine, Syria and Myanmar, and 13 of them joined as official partners at the summit.

The threat from the BRICS is very real because (a) Russia and China are adopting non-USD trade in greater magnitude and alacrity – following the G7’s sanctions against Russia (SWIFT ban and seizure of assets), the US trade war with China (escalated since 2018), the EU’s potential trade war with China and the G7’s warning against China’s small banks for helping Russia evade the sanctions. Russia is pushing oil trade in China’s Yuan/Renminbi and Indian oil refiners started paying in Yuan/Renminbi for the Russian oil since mid-2023.

It must be kept in mind that China is Number 1 in trade (14%), controlling more than 50% of e-commerce trade since 2021 and also Number 2 in GDP size. Russia is Number 2 in oil exports, behind Saudi Arabia.

The second big threat comes from (b) oil trade most of which is in the USD and keeps the USD potent. But, of the top 10 oil exporters in 2023, the top 2 (Saudi Arabia, Russia) and number 4 and 10 (the UAE, Brazil) are already part of the BRICS, number 8 (Nigeria) is now a partner and number 9 (Kuwait) has applied for the BRICS membership. Russia, China, India and Turkey are already trading or seeking trade in non-USD currencies.

Should the BRICS members fully adopt non-USD oil trade, it would be a big blow to the USD.

Meanwhile, yet another de-dollarisation is afloat: (c) rapid rise in accumulation of gold reserves by central banks of emerging economies, including India which bought more gold (recently shifted its gold stocks from London). Reports of IMF and others show, gold holding in official reserves is on the ascendance after the 2007-09 Great Recession – a typical response to global economic uncertainty and geopolitical risks. Gold prices have now spiked to new highs globally and in India.

Options for BRICS

It is in this context (de-dollarisation) that the development of mBridge – alternate payment platform to the USD – assumes greater significance.

The mBridge is a multi-central bank digital currency (CBDC) platform being developed since 2021 in collaboration between the Bank for International Settlements (BIS) and central banks of China, Thailand, the UAE, Saudi Arabia and Hong Kong.

By June 2024, it reached the minimum viable product (MVP) stage – ready for use – and private banks have been invited to join and take it forward. More than 31 are “observing members” of the “Project mBridge”, including the IMF, RBI, European Central Bank and others.

As for digital currencies (CBDCs) required for trade in “local currencies, four big players are ready: China (Digital Yuan/e-CNY is gaining momentum), India (Digital Rupee or e₹ has lost momentum temporarily), Russia (Digital Ruble is gaining more traction) and Brazil (Drex is in second phase of pilot).

Of particular interest is China’s Cross-Border Interbank Payment System (CIPS) in Yuan/Renminbi as an alternative to the SWIFT (India has its own UPI). The Renminbi/Yuan is rapidly globalising too – with active support of Russia (post-sanctions) and India (as mentioned earlier). It must, however, be pointed out that India’s oil trade with Russia is with US consent (“to ensure the prices did not go up globally”) – and not a revolt against the USD.

Why alternate to USD is tough

The BRICS is wary of launching its currency for obvious reasons. Replacing the USD is no mean task.

Firstly, China and Russia have some of the largest USD reserves – $3.316 trillion with China and $633.7 billion with Russia – as of September 2024 – which they can’t dump.

Second, though China is a powerful economy, its currency is a distant Number 7 in the forex reserves of central banks and government – just 2% of total $12 trillion (COFER) in Q2 of 2024.

Its currency was never in contention – and unlikely in future because the developed world has serious reservations about its closed polity. It is best reflected in the works of two of this year’s three Nobel Prize winners in economics, Daron Acemoglu and James Robinson, who marked China as an outlier in economic developments in their 2012 book “Why Nations Fail”.

Third, the proposed IMF’s new world reserve currency – first by Russian President Dmitry Medvedev in 2009 after the 2007-09 Great Recession and supported by Nobel laureate Joseph Stiglitz – never took off.

Fourth, all other contenders of the past have fallen by the wayside:

- The Euro (launched in 1999) rose rapidly, peaked at 28% in 2009 and gradually fell to 18.3% in Q2 of 2024 (COFER) – at Number 2 after the USD 54.1%. The IMF had dismissed its emergence as a challenger to the USD even at its peak in 2009 – doubting the EU’s growth potential (ageing populations, rigid labour markets, strict regulations and other factors), even before the Brexit of 2016 and later debt crisis.

- Japan’s Yen (5.2% of COFER in Q2 of 2024) went out of the race after its “bubble economy” burst in late 1980s.

- The UK’s Pound Sterling had lost the race even earlier – much before the Brexit of 2016.

Three non-traditional reserve currencies in the IMF’s COFER’s list of eight in Q2 of 2024 are insignificant players: Canadian Dollar (2.5%), Australian Dollar (2.1%) and Swiss Franc (0.2%) – below the USD (54.1%), Euro (18.3%), Yen (5.2%), Pound Sterling (4.6%) and Renminbi (2%).